Assignment 6

INTRODUCTION TO FINANCE
Task – 1 Discussion with friends
Different Options for friend

Option 1: The friend can go to the bank and get a company financing. The total amount of
Take a the debt is £20,000. Your company or personal property may be used as security
Bank loan if that's what the bank requires.
Consequences:
Once the loan is paid off, you will own the business outright, but you will be
required to make interest and capital payments to the bank every three
months. As long as you repay your debt on time, the bank will not meddle
in how you run your business.
The bank will likely ask for projections of your company's income,
expenses, balance sheet, and cash flow in this scenario. Banks use leverage
ratios like times interest paid, debt ratio, debt payment coverage ratio, and
debt to cash flow ratio to predict a borrower's capacity to return a credit
based on projected financials.
Your future obligations may also be governed by conditions imposed by the
bank, such as a limit debt percentage or a minimal required debt payment
coverage.
Option 2: Your other option is to find partners willing to give your equity £20,000 in
Equity return for stock in the potential business by selling some of your equity in the
Investors company.
Consequences:
The investor will become the company's de facto leader once their stock stake
exceeds that of all other shareholders combined. Management and operations
can be tailored to the preferences of those in charge. The impact of your buddy
within the business will decrease.
The same in-depth financial projections will be needed here by stock buyers.
Having a sound company strategy to back this up is also essential. With this
information, the trader can determine the company's valuation by discounting its
expected future cash flows to the present value.
Option 3: In this case, you and your friend can run the company together as equal partners.
Business A new spouse can easily afford to put in the necessary £20,000. A acquaintance
partnership can bring you one or more companions to work with.
Consequences:
The firm's profits will be divided among the partners in accordance with the
partnership agreement if more people invest in it. Furthermore, the associate will
not be given full control of the business.

Recommendations:

 All things considered; I think it's best if the friend gets a bank loan. If the business plan
holds water, the firm will generate significant profits from which the debt can be swiftly
 repaid. The friend will have full operational and managerial responsibility for the
company.
 Assuring the company's financial stability will be a top priority for the friend, making
financial preparation a critical task. As part of any good financial strategy, you need to
take a close look at your company's finances. That way, the business can stay on track to
achieve its long-term financial objectives without putting its finances at risk.

Task 2 Decision Making Exercise

1. Analyzing the types of business budget

Mr. Neil Down may have made several different kinds of business budgets for WoodyTrain,
including but not limited to the following:

Operating budget: This budget describes the anticipated expenditures and earnings for the
company over a specific time period, like a month or a year, for example. It incorporates things
like the cost of the products provided the cost of labor, the cost of promotion, and the rent.

Capital budget: The word "capital budget" refers to the financial strategy or the distribution of
funds for the purpose of the acquisition, construction, or enhancement of long-term assets such
as structures, machinery, and property, which are anticipated to generate economic benefits over
the course of several years. The process of evaluating prospective expenditures and establishing
which projects are most likely to result in favorable results while also aligning with an
organization's general strategy is an essential part of the capital budgeting process. Businesses,
municipalities, and other organizations that participate in long-term planning typically prepare
capital budgets on a yearly basis. These budgets are typically kept distinct from operating
budgets due to their focus on longer-term expenditures (Michelon et al., 2020).

Cash flow budget: A cash flow budget is a type of financial strategy that makes projections
about the currency that is anticipated to come in and go out of an organization over a certain
length of time. It offers a precise forecast of the financial situation that an organization will have
at the end of a specified time period, which is typically one month, three months, or one year.

The cash flow budget considers all of the anticipated sources of cash, such as earnings from
sales, loans, and investments. Additionally, the cash flow budget considers all of the anticipated
disbursements of cash, such as compensation, rent, taxes, and payments on loans and other
expenses. The cash flow budget allows a company or organization to plan for potential cash
shortages and surpluses by forecasting expected cash infusions and cash withdrawals. This
enables the company or organization to modify its operations in accordance with the anticipated
deficiencies and surpluses (Vernimmen et al., 2017).

If these budgets were in place, a potential new partner in WoodyTrain would be able to make an
educated decision about whether or not to engage in the company because they would provide a
comprehensive comprehension of the company's requirements and its level of financial
performance.

2. Methods to calculate the unit cost.

Following are the methods to calculate the unit cost.

Activity-based costing method: This approach involves assigning indirect costs to the wooden
train toys based on the specific activities that contribute to the production process. Some
examples of indirect costs include costs associated with setting up the production, costs
associated with quality control, and costs associated with the maintenance of machines.

Full-cost method: The full/total cost of manufacturing can be calculated using the full cost
technique, which factors in all expenses, both direct and indirect, that go into making the final
good or providing the final service. The term "absorption pricing" is often used to describe this
technique. When determining a product's unit cost using the full cost approach, all expenditures
that are closely linked to its manufacture, from raw materials to wages, are factored in. Indirect
costs like housing, electricity, amortization, and other administrative expenditures are also
distributed to the merchandise at a set rate.

Direct method: The direct method is a method of pricing that determines the unit cost of a
product by only taking into consideration the direct expenses that are associated with the
manufacturing of the product. This technique does not consider any secondary costs such as
operating expenditures or administrative costs.

If Mr. Neil Down were to calculate the unit cost of the handcrafted wooden train toys using the
direct method, he would only factor in the direct costs that are associated with the production of
each toy, which typically include the cost of materials as well as the cost of labor. In other
words, the direct method would only consider the costs that are incurred during the
manufacturing process.

3. Comparisons of financial statements

For Sole trader business:

A profit and loss statement and a balance sheet are the two standard components that are
included in the financial statements that are produced for a single proprietorship like
WoodyTrain's business. The earnings and expenditures of a company over a specified time
period are detailed in a document known as a profit and loss statement, which then calculates the
company's overall total profit or loss. A balance sheet is a financial statement that summarizes an
organization's assets, obligations, and ownership as of a particular moment in time.

For Partnership:

The kinds of statements that would generally be included in the financial statements of a single
proprietorship would also be included in the financial statements of a partnership; however,
additional information about the partners' monetary contributions and distributions would be
included.

For limited company

The financial statements of a limited company will generally consist of a profit and loss
statement, a balance sheet, and a statement of revenue movements. These three documents are
referred to as the "big three." The changes in the balance sheet can be better understood with the
assistance of the statement of cash movements, which details the cash the company brought in
and the cash it paid out over a specified time period.

4.
Mr. Neil Down should think about the following before responding to the retailer's request to
supply a large quantity of items at a reduced price:

Cost of production: Toys' reduced price should still cover direct and secondary costs, so Mr.
Neil Down should do the math to make sure the company breaks even.
Capacity: Mr. Neil Down should think about whether or not the company has the manufacturing
capability to quickly deliver the large number of products ordered.

Impact on Customers: If Mr. Neil Down is considering whether or not to take the retailer's
reduced price, he should first evaluate whether or not the merchant holds substantial bargaining
power.

Negotiation power: Consider the retailer's bargaining position and whether or not taking the
store's offer of a lower price is in Mr. Neil Down's best interests as a company owner.

Opportunities for future business: Mr. Neil Down should think about how taking the reduced
price now might affect the company's long-term image and ability to attract new customers in the
future.

Legal considerations: Before agreeing to the reduced price, Mr. Neil Down must check with
appropriate legal counsel to ensure that he is not breaking any pricing or antitrust laws.

Alternative options: Possible alternate courses of action for Mr. Neil Down include getting a
higher offer price or rejecting the offer to pursue other possibilities.

5.

Toy store A

Year Cash flow PV factor Present value

1 £2,00,000 0.893 £1,78,000
2 £1,10,000 0.797 £87,670
3 £2,20,000 0.712 £1,56,540
4 £1,30,000 0.636 £82,680
Total £6,60,000 £5,05,590

Initial investment £3,75,000

Present value of cash £5,05,590
inflows
Payback £1,30,590
Toy Store B

Year Cash flow PV factor Present value

1 £2,00,000 0.893 £1,78,600
2 £1,50,000 0.797 £1,19,550
3 £3,00,000 0.712 £2,13,600
4 £2,50,000 0.636 £1,59,000
Total £9,00,000 £6,70,750

Initial investment £4,25,000

Present value of cash £6,70,750
inflows
Payback £2,445,750

Payback of store B is more than the Store A so; it is recommended to invest in store B.

Hamleys Group Limited (Toy Store)

1. Evaluation of financial statement

Before attempting to analyze the Hamleys Group Limited financial statements, it is essential to
acquire a fundamental understanding of the organization and layout of the published accounts for
the company. When we look at the financial statements of the business, we can see that they are
displayed in a manner that is consistent with the International Financial Reporting Guidelines
(IFRS). The balance sheet, the income statement, the statement of comprehensive income, the
statement of cash movements, and the statement of changes in ownership are the components
that make up the financial statements.

A snapshot of the company's financial situation at a particular moment in time is provided by the
balance sheet. This snapshot details the company's assets, obligations, and ownership at that
point in time. The income statement provides information regarding the earnings, expenditures,
and total income of the business for a specified time period. On the company's statement of
comprehensive income, in addition to the net income of the business, other comprehensive
income elements, such as corrections for the translation of foreign currencies and financial
profits and losses on defined benefit plans, are presented. The company's cash entries and
withdrawals over the course of the period are detailed on the statement of cash flows. This
information includes cash generated from operating, investing, and financial operations. The
changes in the company's equity over the period are detailed on the statement of changes in
equity. These details include the company's net income and other comprehensive revenue
elements, in addition to the changes in equity that were caused by interactions with the
company's shareholders.

The financial statements of Hamleys Group Limited, on the whole, are displayed in a way that is
understandable and well-organized, adhering to the necessary framework and structure for
financial statements prepared in accordance with IFRS.

2. Description of ratio groups

a) Profitability ratios

Measures of a company's profitability and return on investment can be obtained using

profitability measures. The return on assets (ROA) and the return on equity (ROE) are two
prevalent income statistics. ROA compares a company's profit to its overall assets, while ROE
compares it to its shareholders' equity. Management can use these numbers as a basis for
assessing the company's success and determining where to distribute resources. Stakeholders,
including financiers and debtors, can use them to gauge the firm's financial strength and weigh
the potential benefits and drawbacks of doing business with it (Prasetyo, 2019).

b) Liquidity ratios

The company's liquidity ratio indicates its capacity to pay its short-term obligations. The current
ratio and the fast ratio are two examples of common liquidity ratios that evaluate a company's
ability to meet its short-term obligations with the resources it currently has on hand. Stakeholders
can use these measures to evaluate the financial security and danger of a company, and
management can use them to ensure that the business has adequate cash to fulfil its financial
commitments (Durrah et al., 2016).
 c) Efficiency ratios

The percentage of a company's resources to its income generation efficiency is called an

efficiency ratio. The asset turnover ratio and the inventory turnover ratio are two examples of
efficiency ratios that evaluate a company's capacity to transform its assets into revenue.
Stakeholders and management alike can use these numbers as a yardstick by which to measure
the company's productivity and uncover areas for growth (Hays et al., 2009).

d) Capital ratios.

The capital ratios of a business are a way to evaluate its debt-to-equity financing ratios. The
debt-to-equity ratio and the debt-to-assets ratio both evaluate a company's financial position in
relation to their respective debt and equity levels. Management can use these measures to
analyze the company's financial burden and risk, and consumers can do the same (Cifuentes et
al., 2022).

e) Investor ratios

The success of a business and its desirability as an investment can be measured using investor
ratios. Dividend return and the price-to-earnings (P/E) ratio are two typical indicators of a
company's attractiveness to investors. Potential buyers can use these measures to assess the
company's success relative to its competitors and the market as a whole, as well as to calculate
their expected yield on investment. Management can use them to gauge the company's appeal to
shareholders and decide whether or not to distribute profits.
References
1) CIFUENTES, R., GÓMEZ, T. & JARA R, A. 2022. Capital Ratios and the Weighted
Average Cost of Capital: Evidence from Chilean Banks.
2) DURRAH, O., ABDUL RAHMAN, A. A., JAMIL, S. A. & GHAFEER, N. 2016.
Exploring the Relationship between Liquidity Ratios and Indicators of Financial
Performance: An Analytical Study on Food Industrial Companies Listed in Amman
Bursa. International Journal of Economics and Financial Issues ISSN: 2146-4138, 6,
435-441.
3) HAYS, F. H., DE LURGIO, S. A. & GILBERT, A. H. 2009. Efficiency ratios and
community bank performance. Journal of Finance and Accountancy, 1, 1-15.
4) MICHELON, P., LUNKES, R. & BORNIA, A. 2020. Capital budgeting: a systematic
review of the literature. Production, 30.
5) PRASETYO, E. 2019. PROFITABILITY RATIO ANALYSIS FOR DETERMINING
STOCK INVESTMENT IN PT. UNILEVER INDONESIA 2008-2018 PERIOD.
6) VERNIMMEN, P., FUR, Y., DALLOCCHIO, M., SALVI, A. & QUIRY, P. 2017. Cash
flow.